It's fairly obvious that commodity prices are important when evaluating an exploration and production company, and nowhere is the importance more evident than when analyzing the industry's year-end reserve reports.

IN PICTURES: 10 Tips For Choosing An Online Broker

Standardized Measure
The Securities and Exchange Commission (SEC) mandates that exploration and production companies report a metric known as the standardized measure of discounted future net cash flows. This is the present value of the cash flow that a company's proved reserves will generate after taking into account production and development costs and taxes.

Companies also report a non GAAP measure known as the PV-10 value, which represents the net cash flows that these proved reserves will generate, discounted at 10%. A company will typically calculate this measure using the average monthly prices over the preceding year, and will also present an alternative valuation using higher commodity prices.

Denbury Resources (NYSE:DNR) recently reported its proved reserves for 2010 and reported a PV-10 value of $7.3 billion for these reserves using an oil price of $74.36 per barrel and $4.29 per Mcf for natural gas.

The company also reported an alternative value for its proved reserves of $9.4 billion using higher commodity prices based on the futures market. These prices were $87.31 per barrel for oil and $5.46 per Mcf for natural gas.

Denbury Resources went one step further in helping by disclosing the sensitivity of the value of its reserves to various commodity prices. Every one-dollar change in oil prices would result in a $146.5 million change in value. The value would fluctuate by $10.8 million for every ten-cent change in natural gas prices. This sensitivity only applies to small changes in prices because a large change might force the company to recalculate the amount of its proved reserves.

Not all exploration and production companies provide this level of detail. Pioneer Natural Resources (NYSE:PXD) reported proved reserves of 1.011 billion barrels of oil equivalent at the end of 2010. The company reported the PV-10 value of these reserves at $8 billion, and the standardized measure at $5.4 billion.

Unit Corporation (NYSE:UNT) reported proved reserves of 622.2 Bcfe at the end of 2010, and calculated the PV-10 value at $1.3 billion and the standardized measure at $900 million. Concho Resources (NYSE:CXO) reported year-end proved reserves of 323.5 million BOE disclosed a PV-10 value of $6.1 billion.

All of these companies used the lower SEC prices to calculate the PV-10 value and no alternative value using higher commodity prices was disclosed.

The Bottom Line
The exploration and production industry reports the value of its proved reserves using the government mandated commodity pricing, and an alternative value using higher futures prices for oil and natural gas. This makes it easier for investors to see the impact of commodity prices on the value of these reserves. (For additional stock analysis, see Natural Gas Forecast.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Savings

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  5. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  6. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  7. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  8. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  9. Fundamental Analysis

    Calculating Return on Net Assets

    Return on net assets measures a company’s financial performance.
  10. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
RELATED TERMS
  1. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  2. International Financial Reporting ...

    A set of international accounting standards stating how particular ...
  3. Days Sales Outstanding - DSO

    A measure of the average number of days that a company takes ...
  4. Equity

    The value of an asset less the value of all liabilities on that ...
  5. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  5. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  6. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!